New foreclosure investors often make crucial mistakes by failing to analyze each deal all the way through the process–including the selling or “exit strategy.” It’s easy to get excited about the deal and forget that as soon as you own the property, expenses begin. So you have to invest with the end in mind.
How you exit–or sell the property will often determine how you should buy!
4 basic exit strategies to keep in mind
Here are the basic exit strategies you need to know and understand the implications and expenses, if any:
- Flip the property, either wholesale or retail, to a quick buyer or an investor
- Reinstate the foreclosure and retail to an outright buyer who gets a bank loan
- Reinstate and sell by you acting as a “bank” using owner financing instruments
- Reinstate and keep the house, then rent it out
Make every effort to learn as much about these exit strategies as possible because each has its own risks and benefits attached.
If you are thinking of “reinstate and rent” as your exit strategy, you are going to look at the deal entirely differently than if you planned to “flip” to another investor.
Structuring your foreclosure deal
There are five basic ways for you to construct a deal during the foreclosure process:
1. Acquire an Interest. You can control a property by acquiring an equitable interest by a Purchase Contract or by an Option Agreement. You do not have to have the legal title to the property, and you can profit by selling your position in that contract.
Please be aware that all your activities here are still subject to the foreclosure threat and its rigid timeline. In most cases the property will have no equity and in order to sell our position (flip it), we will perform a short sale (a process that usually lasts 4 to 8 months depending on a bank).
2. Acquire Ownership by Bringing the Loans Current. You can buy property by taking over the existing debt on the property (also known as a “subject to” purchase) and stopping the foreclosure process by curing the loans using cash.
You become the legal owner via the deed. The earlier in this process you get involved, the less cash you will need to reinstate the loan.
3. Acquire Ownership by Paying off the Loan. You can get full ownership via the deed–that is getting the legal title by paying off the existing loan, like a conventional purchase. As soon as the new loan pays off the loan in foreclosure, that threat and the pressure it causes is GONE.
4. Acquire Ownership Without Stopping the Foreclosure. Like gambling in Las Vegas? You can get the deed and ownership of the property without paying off or reinstating the loan, but subject to the foreclosure threat and its time line. It is very important that the seller understands your plan, the real risk, and agrees to it in writing!
You will be disclosing to the seller up front that the only way the foreclosure will be avoided is:
- If you can find a buyer who can cure the foreclosure prior to the foreclosure sale, or
- If you can get the lender(s) to work with you and accept a lower payoff and give you some time to arrange financing.
If you can’t get either of these things done, the seller will lose the house.
5. Acquire Ownership via “Deed in Lieu.” This is sometimes called the “back door” approach. To avoid having a foreclosure on their record (the mark of death as far as their credit is concerned) the borrower may make an arrangements with the lender to voluntarily deed the property back to them. This process is called “Deed in Lieu of Foreclosure.”
Now you can try to be that lender! If you focus your effort on buying junior liens, you will be stepping in the junior lenders’ shoes with the right to start foreclosure yourself. You can approach the borrower with the “Deed in Lieu” proposal once you have initiated the foreclosure.
This is a great back door approach – you would be reinstating the senior loan and getting the property “subject to” those loans.
It’s not mix and match
The important thing to remember is that you must have the right exit strategy prepared for each of these deals. Thoroughly evaluate every deal you get involved with and understand the risks and benefits–especially in foreclosure investing.
[More reading: Powerful Marketing Strategies That Really Work and How to Pre-screen Leads and Focus on the Best]
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